Do you own a small business and still use your bank to handle foreign currency conversions or transactions? If your answer is yes, then your business is probably losing a substantial amount of money to exorbitant, poorly optimized currency exchange rates. Without a dedicated foreign exchange (FX) service, your business will also be very limited in its ability to hedge exposure to foreign currency risk.
Unlike retail banks, FX providers, which often specialize in small business clients, can tailor their product and service offerings according to the FX requirements of your business. Although specific recommendations will vary between FX providers, this process will usually include personalized business advice on transaction timing and foreign currency invoicing and receipting.
If you’d like to know more about what an FX provider can do for you and your business, we’ve compiled a comprehensive overview of FX services for small businesses trading minimum $5,000 per year, including what FX services are, what FX products you can choose from, and how your small business can benefit from a dedicated FX strategy.
What are FX Services?
FX service providers help minimize the business pressures of handling foreign currencies. Broadly speaking, the term “FX services” refers to any financial products that deal with foreign currency transfers or payables, including foreign currency accounting, FX currency conversion, and exchange rate hedging. The latter entry on this list, foreign currency hedging, is one of the most common FX service applications for small businesses. This is because hedging foreign exchange rates gives small businesses a way of offsetting their exposure to currency risk.
Currency risk arises due to the possibility of unfavorable relative changes in the exchange rate between a business’ domestic and foreign currencies. Small businesses are especially exposed to currency risk when converting international revenue — which has been transacted and transferred in a foreign currency — to their domestic currency.
What FX Services Does Your Small Business Need?
FX service providers offer a wide range of FX and FX-peripheral products. To help you understand how FX products can cut costs, reduce currency risk, and add value to your small business, we’ve briefly outlined some of the most useful services offered by FX providers:
· Foreign currency term deposit: As the name suggests, a foreign currency term deposit gives your small business a way of storing foreign currency at a fixed interest rate for a fixed term period.
· FX spots: In FX markets, a spot trade is a transaction — filed at a specified exchange rate — for the instant delivery of an allotment of foreign currency on a pre-arranged short-term date (usually within 2 business days of the transaction). When used as a part of a dedicated FX strategy, FX spots can protect you against currency fluctuations in any profits or costs carried over from business in overseas markets.
· Forward contracts: A forward contract specifies an exchange of currencies on a future maturity date, at a previously determined currency rate. By locking in a guaranteed foreign exchange rate, your small business can model exact foreign currency cash flow conversions. Given a more accurate projection of domestic currency cash flow, your small business will be able to plan for and adjust commercial pricing structures accordingly.
· Currency call options: By purchasing a currency call option, your small business has the right (but not the obligation) to buy an allotment of foreign currency at a pre-determined exchange rate within a specified time period.
· Currency put options: By purchasing a currency put option, your small business has the right (but not the obligation) to sell an allotment of foreign currency at a pre-determined exchange rate within a specified time period.
Three Reasons Why Your Small Business Should Invest in FX Services
1. Your Business Oversees Import or Export Product Transactions
Importing and exporting international products is no longer the purview of large corporations or multinational organizations. As global markets become increasingly globalized, more and more entrepreneurs are entering the international supply chain, at both a physical and digital level. A dedicated FX service not only streamlines the accounting procedures for receiving money from abroad or paying suppliers overseas, it also provides your small business with access to platforms with substantially more competitive exchange rates.
2. Your Business Is Exposed to Foreign Currency Risk
Remember, if you’re concerned by the unreliable nature of your business’ import or export cash flow, you can exercise FX option contracts, such as foreign currency puts or calls, to limit your exposure to FX risk. Alternatively, if you’re going to be receiving a guaranteed foreign currency payment at a volatile exchange rate, you can use spot trading or strategic forward contracts to hedge against an undesirable exchange rate outcome.
3. Your Business Holds International Assets in Foreign Currencies
If your small business is using one or more foreign currencies as an investment, it’s important that you keep a very close eye on the portfolio’s tolerance metrics for risk and growth. Unfortunately, as FX markets are a relatively volatile asset class, it can be easy to slip up in monitoring your foreign currency holdings, especially if you’re busy with the day-to-day management of a small business.
By partnering with an FX service provider, you, as a small business owner, will have access to a suite of sophisticated FX analytic tools. After being configured for your business, these tools can be used for setting up exchange rate alerts, monitoring currency pair trends, and executing automatic buy/sell orders across both domestic and foreign currency markets.
If you’re planning to expand your small business’ presence in international markets, we strongly recommend investing in FX services now rather than later. In addition to minimizing the currency risks incurred by foreign market growth, FX services are also completely scalable with the broader growth actions that occur when taking a small business to a medium-sized commercial operation.
On the other hand, if you’re in a position where you’d prefer to consolidate your small business, an FX strategy will ensure that you’re optimizing day-to-day risk exposure and maximizing currency exchange profit margins. The underlying point we’re getting at here is that there’s an extraordinary amount of variation in the type and utility of FX services available to small businesses.
If you’re unsure about how to implement FX solutions in your business, you really have nothing to lose by getting in touch with an FX provider and requesting an evaluation of your business’ FX service requirements and exposure to foreign currency risk.